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This Time Really is Different

The year was 1930.  The greatest depression in US history closed around the nation like a dark shadow.  Congress was desperate to do something that put the nation to work again.  What could do it?  Rep. Willis Hawley (R-OR) and Sen. Reed Smoot (R-UT) had a plan – close down imports and make Americans buy products made in America.  Their plan, the Smoot-Hawley Tariff, raised import taxes on over 20,000 items to about the highest level they had ever been.  Nations around the world responded with their own tariffs, starting with Canada, slashing all trade in and out of the US in half.  Nearly everyone agrees that this made the Great Depression much worse everywhere.

Flash forward to 2013.  Japan returns the Liberal Democratic Party to power on the promise to put the nation to work again.  Their plan?  Not to shut down trade, but to increase it – goosing exports by lowering the value of their currency and making their stuff cheaper.

The situations and the plans are very similar, but the underlying assumption is completely different.  The world has passed from Nationalism to Globalism as the basic driving force.  And that difference is worth thinking through.

Willis Hawley and Reed Smoot, a happy couple

Willis Hawley and Reed Smoot, a happy couple

The Japanese plan is not fundamentally different from standard practice around the world, but it is unique in scale and audacity.  China has kept the Yuan (Renminbi) low for years to boost exports, as have many smaller nations.  Incoming Bank of England Governor Mark Carney promises to drop the British Pound 15% for the same reason.  Keeping a national currency on the low end of what the rest of the world will accept is very much standard procedure in order to boost exports and thereby jobs while keeping the net flow of cash into the nation.

Nations do not raise tariffs anymore thanks to a series of international agreements, enforced by the World Trade Organization (WTO).  But there are similarities between tariffs and currency trashing as well as key differences.  A thought experiment is in order.

Let’s say you live in Tariffania, a land that has jacked up import controls and generally been isolated by corresponding retaliation.  Everything that is consumed in Tariffania is made there, guaranteeing jobs to the proud citizens.  Luxury items like Italian wine, Korean phones, and US made snack cakes are simply unavailable.  People generally do without, sometimes opting for the local booze, gadgets, and homemade cookies.  What little does come in is very expensive, and to the extent anyone buys the stuff it contributes to some inflation.  Life is a bit dismal, and only the rich have the good (imported) stuff.  People who do have jobs save the Tariffania Auros (TFA) they earn in the factories because there is nothing better to do with it.

king_yakkoNow try living in Toiletpaperstan, a nation that prints their currency the Blech (TPB) like crazy.  Imported goods are also expensive, so people don’t tend to buy them either.  But the factories are humming making circuit boards for a Korean firm and the local whiskey is expensive only because so much is shipped overseas.  The biggest problem is inflation, so people don’t save much.   They tend to consume like crazy and everyone eats the local pastries from cafés rather than lose out at the local banks.

In some ways, their lives are the same – the stuff from the rest of the world isn’t a part of daily life.  Both places are set up to benefit the working class.  People tend to do without in both cases, but life is a bit better in Toiletpaperstan.  It’s also more equal, since investments are very hard to come by and there isn’t much of a wealthy class.  Those with serious money stash it away abroad and travel to find good times.

Why does this matter?  Because that basic assumption of globalism that makes the TPB a largely worthless currency fuels a sense of equality that is more dynamic.  A more conservative cynic would say that everyone is equal because they are all broke.  But there is growth under the TPB that the people of Tariffania would never recognize.  There just isn’t a lot of it.

moneybagsThis difference is important because of how it plays out in the long run.  The TFA is comparatively stable, and their situation can continue as long as the population puts up with their lower standard of living.  The TPB, by comparison, will eventually become so worthless that it has to default and everything starts over.  Between 1967 and 1994 Brazil had no less than 6 new currencies introduced to replace the old ones that had failed.  The result was chaos.

So is the new way of dealing with a depression that much better than the old way?  The short answer is yes, but the long answer is no.  If the nations pursuing the policies that are sparking a currency war can pull out of it before the collapse everything will be fine.  That just doesn’t happen when the population becomes fat and happy – and it certainly can’t happen when there is one currency tied to other nations like they have in Europe.  Greece, and to a lesser extent Spain and Italy, were caught trying to keep doing things the old way even though it wasn’t possible anymore.

Who can blame them?  Well, the currency and bond markets do.  What’s unique about the new way of keeping people employed is that it pretends to use market forces even while it gooses them constantly.  Eventually, they have to go to the bankers of the world and beg forgiveness.

Were Smoot and Hawley right in the end?  Not a chance.  The world has changed, and for the better.  Globalism does work, and it does even things out.  Governments can work to spike their way out of a temporary bad situation, but they can’t rely on trashing their currency forever.  Both methods fail because they do not look out for the long run – which is where so many governments fail today.

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14 thoughts on “This Time Really is Different

  1. Now you sound like Paul Ryan…”We can do this, we can sustain 4% annual growth, we can do this!”…blah, blah, blah. Money needs to first circulate locally and go through several pairs of hands BEFORE it reaches the national corporations, and then export, imports.

    • I won’t disagree at all … well, with the Paul Ryan part. Yes, the velocity of money is very important – and the more in the hands of people who need it the faster it goes through the economy. But you can’t goose things artificially forever – there has to be some real equity built into the economy.
      Consider what Brazil has done since 1994. They are still a leftist, almost socialist nation. But they are doing it right now! They have sustainable growth that is lifting the nation out of poverty. It’s not always as even as they want, and they have a lot to work on, but the path is pretty clear.
      There isn’t really a left/right argument here, nor is there a rich/poor argument. I’m trying to work a short/long term give and take instead.

      • We do have an incredible infrastructure. We also have wall street and the financial industry destructuring everything. Where did I read that 48% of our economy is based on financing and debt, that is insane.

      • Exactly! We don’t want to owe everything to the banks. That’s really what our problem is right now. We talked before about how to get out of that problem – this piece is how to avoid getting into it. Japan is going headlong into a pretty bad mess if they aren’t careful, and there is pressure on a lot of nations to follow them. I hope we can all find another way.

  2. Good blog. I think you could have said a lot more about how this new system puts the left/democrat/progressives who favor it in the hands of the bankers because of all the debt however. That is where they really fail in the long run.

    • You are right, that is the real problem. Borrowing a lot of money leaves the government very vulnerable and makes sustainable progress much more difficult. There is a lot more to say on that, yes!

  3. As long as this is there is a lot more to say. I feel like I am just starting to get it. The old way of doing things is dead but couldn’t a nation still try to raise tariffs? Just because the WTO imposes sanctions that doesn’t mean no one will do it. I guess they wind up like North Korea which is what Tariffania sounds like to me but there have to be other examples.

    • I wasn’t thinking of North Korea, no, but it does seem like it now that you mention it. No nation does this today and the result really is isolation. It’s hard to imagine. WTO sanctions are a real kiss of death. That is what changed.

  4. I don’t know but maybe it comes down to demographics. Japan and even China I think are aging nations. And the answer seems to be robotics which is one of Japan’s biggest exports and was a key to their success in manufacturing. Now Brazil is a young nation demographically and they have a large oil reserve off shore.
    And hey I like your wit toiletpaperstan.

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